Oct 9, 2007
Executives
Tony Thene - IR Alain Belda - Chairman & CEO Charles McLane - CFO
Analysts
John Hill - Citigroup Kuni Chen - Banc of AmericaSecurities John Tumazos - Independent Research Anthony Rizzuto - Bear Stearns Charles Bradford - Bradford Research Michael Gambardella – JP Morgan Joshua Golden – JP Morgan David Gagliano - Credit Suisse Jim Brown – JP Morgan
Operator
Welcome to the third quarter 2007 Alcoa earnings conferencecall. (Operator Instructions) I'd now like to turn the presentation over toyour host for today's call, Mr.
Tony Thene, Director of Investor Relations.Please proceed.
Tony Thene
Thank you, Sean. Good evening and thank you for attendingAlcoa's third quarter 2007 analyst conference.
At today's conference, AlainBelda, Chairman and CEO will give an overview of the significant events in thequarter, as well as a view of current market conditions and strategicinitiatives. Chuck McLane, Executive Vice President and Chief FinancialOfficer, will then review the third quarter financial results, as well ascurrent and next quarter's anticipated business conditions.
Before I turn it over to Alain, I would like to remind youthat in discussing the company's performance today, we have included some forward-lookingstatements within the meaning of the Private Securities Litigation Reform Actof 1995. Such statements relate to future events and expectations and involveknown and unknown risks and uncertainties.
Alcoa's actual results or actionsmay differ materially from those projected in the forward-looking statements. For a summary of the specific risk factors that could causeresults to differ materially from those expressed in the forward-lookingstatements, please refer to Alcoa's Form 10-K for the year ended December 31,2006, and Forms 10-Q for the quarters ended March 31, 2007 and June 30, 2007filed with the SEC.
In our discussion today, we have also included some non-GAAPfinancial measures. You can find our presentation of the most directlycomparable GAAP financial measures calculated in accordance with GenerallyAccepted Accounting Principles and our related reconciliation on our website atwww.Alcoa.com under the investors section.
At this point let me turn it over to Alain.
Alain Belda
Thank you, Tony and good evening, everyone. We certainly hada significant amount of activity and challenges in this quarter.
We had a seasonalslowdown in Europe and the softening of key markets inthe U.S. andcontinued cost pressures with energy and the U.S.
dollar devaluation, as wellas lower metal prices. To offset these external pressures, we continued to focus onproductivity improvement, market share gains and new products.
In addition, wedid a lot of portfolio management and restructuring. We sold our 7% equityholding in Chalco and received $2 billion in proceeds.
We withdrew our offerfor Alcan and took the charges related to that offering. We announced the saleof two businesses and continued to restructure our downstream.
For the packaging and consumer business we've receivedindicative offers from several potential buyers and are confident enough withthe process to state that we intend to close by the end of this year or earlyin 2008. For the AFL business, the most prudent course of action hasbeen to implement a significant restructuring aimed at reducing the coststructure and returning this business to an acceptable return.
We will thendetermine the best course of going forward with that business. Keeping it in perspective, on a year-to-date basis throughthese three quarters we have established all-time records for revenue,earnings, earnings per share and cash from operations.
Lastly, yesterday theboard authorized a significant increase in our current share repurchase program,moving from 10% to 25%, underscoring our belief in the inherent value of the companyand its long-term potential. Let me take a minute and give you more details of thethought process concerning our Chalco decision.
We do not normally takeminority stake, but we did participate in the Chalco IPO six years ago. We sawthis, at the time, as an opportunity for us and a way to help Chalco enter theequity market.
The transaction yielded proceeds of $2 billion and a totalshareholder return of greater than 1000%, or 44% on an annualized return basis. This has changed nothing concerning our commitment to China.We look forward to continuing to work with our partners there to help theindustry realize its great potential.
We opened our first office in Chinain 1993 and currently operate 17 manufacturing facilities there, and we are inthe midst of a major expansion of our Bohai rolling mill where we are investingapproximately $300 million in an advanced hot rolling mill. We anticipatehaving this mill commissioned early next year.
Now, I'd like to give you an update on the aluminum marketand then close with a quick update on the strategic initiatives for ourcompany. Visible stocks are higher with the LME up to more than 100,000 tons inSeptember.
Most of that increase came in the U.S.and Europe, while the Asia regionactually declined. Metal being placed in warrant should not be confused withmetal being sold to the LME cash market.
This move from off warrant to warrantwas, in my view, driven by increases in the cost of credit which forced morevisibility on stock and kept off the warehouses. Even with these increases, total inventory defined in daysof consumption is still at a healthy level, more than three days lower than itwas at the same period last year of about 35 to 37 days total.
On the demand side, Chinaremains a major driver of growth. We increased the projected growth rate forChinese primary consumption this year to almost 36% and we estimate Chinaincreasing their production by 34% this year, a total production number of 12.5million tons per year.
There is no evidence that export bans have led toinventory build and we continue to believe that their growing domesticconsumer-driven market will absorb all of this production coming onstream thisyear and next. While the strong Chinese consumption garnered most of theattention, other countries are growing also.
Latin Americais up 7.8%, driven by strong demand in Brazil;Asia excluding Chinais up 5%, driven primarily by India,Vietnam and Thailand;and the U.S. issoftening with a projected decrease of 6% in consumption year over year.
Butthe whole world, pulled by Chinaand the other BRICK countries is estimated to grow in excess of 10% this year. Even with all of this smelter capacity growth in China,they are still not self-sufficient.
They remain a net importer of aluminum andwhen looking at the whole picture and including scrap imports, which were morethan 200,000 tons in August, they've exceeded 1 million tons this year. So wecontinue to see robust demand in Chinaand strong markets fundamentals.
At the same time, they continue to look foropportunities outside of their country for bauxite, for alumina, for aluminumindicating that the power situation and the high cost of alumina willeventually constrain their growth and create opportunities elsewhere. In summary, our latest supply and demand balance is asfollows: For alumina, we have again lowered our projection from arange of balance to 1 million tons surplus, to a range of balance to 500,000ton surplus, driven by slower ramp-up and brownfield expansions and higherChinese metal production.
The spot market for alumina supports this change.Recent prices have exceeded $375 per ton. For aluminum, we continue to project 300,000 tons of surplusfor 2007, but keep in mind that this is less than 1% of the 38 million tons, orabout three days of global supply.
Given that we can't be 100% precise on thein-process inventory build up at both primary production and fabricatedlocations in China,as well as the logistic friction, this is not a worrisome number. But for sure,China willremain the arbiter of world prices in the coming years in our industry.
Let's now move to the other end markets. In the thirdquarter, the end markets went through their normal summer slowdowns.
This year,that impact was compounded by the uncertainties in the financial market and thedestocking occurring at the distributor level. Aerospace continued to be a verystrong end market for us, with Boeing, Airbus, Embraer and Bombardiercontinuing to report robust growth in order backlog.
Commercial aerospacedeliveries are up 7% in the first half of 2007 and are forecast to increase 12%in 2008. However, in the short term, the supply chain is in anoverstock position.
This has led to destocking of distributor inventories whichhas adversely affected the shipment mix of some of our businesses in both the U.S.and Europe. We anticipate this destocking continuinginto the first quarter of next year and in addition, the delay of the A380 hashad an impact and that demand is expected to pick up late in the first quarterof next year.
North American automotive markets continue to presentpersistent weakness. In addition to the anticipated summer shutdown, morepronounced production declines due to overtime reduction at Ford and Chryslerand lower demand for light trucks are expected.
Higher inventory levels in thequarter will likely lead to further reduction cuts in the first quarter andseasonal adjusted sale rate is now estimated down to 60 million units, thelowest mark since 1998. North American Class 8 truck demand has softened due to thelarge 2006 prebuy.
They're down about 54% from the prior year and 42%year-to-date, and we believe the fourth quarter Class 8 production is expectedto be even lower than the third quarter level, impacting also trailer buildrate. Non-residential building and construction markets remainstrong in spite of the prevailing uncertainty in the credit markets.
Now let me give you an update on our strategic initiatives.In the upstream market, our strategic direction is focused on securing keybauxite reserves and low-cost stranded power, with a strong preference forrenewable power. We're focused on repowering our North American and Europeansmelters through power contract extensions as well as joint venturearrangements.
We continue to invest in breakthrough technologies for oursmelters and refineries. We continue to work in Brazilon our Juruti bauxite mine development, our Sao Luisrefinery expansion, and a growing number of hydro projects.
We continue to moveforward on a potential refinery in Guinea,another strategic bauxite region in the world. In smelting, we are in the start-up phase of the greenfieldsmelter in Icelandand full production has been restricted due to the delay in the completion ofthe power project.
We are cooperating with the power company to address theseissues and we now project full power to be available in the fourth quarter andestimate production for 2008 to be 300,000 tons for the full year. We have MOUs signed in Greenland and North Iceland, both based on renewable energy and we are pursuingsmelter positions in Chinaas well as in the Middle East, most likely throughadditions to joint ventures.
We have also clarified our strategic downstream focus. Weare in, and will stay in, businesses that are based on proprietary technologiesand alloys, unique equipment and complex processes that serve rapidly expandingcommon end markets.
Flat roll products, hard alloy extrusions, forging,fasteners and air foil businesses. In both segments, upstream and downstream, we continue topursue profitable organic growth, geographic expansion, market specializationand segmentation, as well as profitable acquisition growth.
We have taken additional steps in our portfolio and havefurther tightened the focus of the company and monetized long-held opportunisticinvestments. These actions have helped with our capital structure, capitalredeployment objectives and shareholder interest.
After completing thesoft-alloy extrusion joint venture last quarter, we are focused on thedivestiture of the packaging business, the restructuring of the AFL business,and returning that business to an acceptable rate of return. The sale of the Chalco investment allows us to monetize thegain and redeploy the proceeds in other areas to enhance shareholder value.
Althoughthese actions gave the board the confidence to significantly increase our sharerepurchase program from 10% to 25% over the next three years, in addition toour dividend increase announced in the first quarter of this year. Both actionsunderscore our belief in the inherent value of the company and our long-termpotential.
At the end of 2006, we established six financial targets for2007. For the target cash from operation will exceed capital expenditures;volume, mix, productivity will exceed cost inflation; and capital expenditureswill not exceed $3.2 billion.
We are on target, excluding the impact ofcurrency, and we are on track to beat our target for ROC, EBITDA marginimprovement and debt-to-capital targets. In summary, a significant progress and value has beenachieved through the first three quarters, ending with a strong balance sheetdespite substantial investments in growth and after significant restructuringand divestiture charges.
Well, as I said on my first slide, the third quarter waschallenging with seasonality increases in energy costs, a weakening U.S.dollar, lower metal prices. In addition, increased costs of getting ourRockdale, Tennessee smelter backto full operation and bringing our greenfieldsmelter in Icelandonline.
For sure, these are increasingcost pressures in raw materials and energy, but we continue to work atoffsetting these increases with our ABS approach to management. The aluminum market is growing at a healthy rate.
The endmarket uses continue to expand as a consequence of globalization andurbanization. Aluminum price discount to copper and zinc has createdapplication expansion and the environmental pressure on CO2 reduction willcreate excellent opportunities going forward.
As a consequence of closures and more disciplined operations,European rolling mills are, for the first time in 30 years, operating at fullcapacity. In the U.S.due again to a more disciplined operation, but also due to plantspecialization, plants are making cost of capital even while operating at lowervolumes than rated capacity.
2007 has been a destocking year in the industrializedeconomies. Finance costs have forced non-visible inventories to be visible.This has changed the pricing fundamentals which are based on days of inventoriesand supply and the shape of the cash cost curve.
We have new, low-cost plantsstarting next year and the year after that. We have contracts with metal pricecaps that are expiring over the next two years, and cost reductions in areaslike healthcare are materializing.
We have start stops in Chinaand a turnaround process in Russia.We have new products, new markets and new technologies. All have a positive impact on EBITDA and cashflow.
With our position in upstream and downstream, we are very optimistic aswe look forward. Thank you for your attention and now let me turn it over toChuck.
Charles McLane
Thanks, Alain. Goodevening, everyone.
I'd like to take an extra few minutes with you today andprovide an enhanced level of transparency so that you can see the exact impactof many of the activities in the quarter; but first, a financial overview. Income from continuing operations was $558 million or $0.64per share.
These numbers include both the gain on the Chalco sale as well asthe restructuring cost. Quarterly revenue of $7.4 billion was down 8%sequentially, due primarily to the lower metal price, the negative impact ofthe normal third quarter seasonality, and the elimination of revenue associatedwith the completion of the soft alloy extrusion joint venture.
Each of the four downstream segments continue to haveimproved EBITDA margins compared to '06. Year-to-date, flat rolled productsstand at 6.8%; engineered solutions at 11.9%; extruded and end products at 5.2%;and packaging and consumer at 9.2%.
Cash from operations was $592 million aftera $206 million pension contribution. On a year-to-date basis, we achieved all-time highs andincome from continuing ops, earnings per share, revenue and cash fromoperations.
Debt-to-capital currently stands at 29%. We continue to exceed thecost of capital with an ROC of 11.8%.
Excluding our growth investments, returnon capital stands at 14.6%. Lastly, as Alain noted earlier, the company took significantstrides in executing on its portfolio strategy by monetizing the Chalcoinvestment and by reaching decisions on the sale of the packaging and consumerbusiness and the auto casting business.
In addition, we have initiatedsignificant restructuring plans for our AFL business. The net impact of theseactivities will give us flexibility in our capital structure as we look toincrease shareholder value.
With that overview as a backdrop, let's look at the bridgecomparing second quarter to thirdquarter performance. As we do every quarter, this chart bridges sequentialincome from continuing operations, excluding restructuring and transactioncosts.
Even with the current cost pressures, we were able to achieve asequential net productivity increase of $13 million, predominantly in thedownstream segments. Energy costs were up $32 million sequentially, primarily inour upstream segments.
The weakening of the U.S. dollar continues to play asignificant role in our operating results, increasing the cost of our non-U.S.manufacturing base.
Sequentially, the following currency has appreciatedagainst the U.S. dollar: Australian dollar 2%; Brazilian real 4%; euro 2%; andthe Canadian dollar 5%.
On a year-over-year basis, the A-dollar was up 12%, thereal 13%; the euro 8%; and the C-dollar 7%. The impact of seasonality across all downstream segments was$59 million and will be detailed as we move through the segments.
On a one-monthlag basis, the LME cash price was down $149 a ton, resulting in a sequentialdecrease of $135 million. Finally, the Chalco sale was equal to $1.14 billion in netearnings, or $1.30 per share.
To change gears for a minute looking at 2007 versus 2006year-to-date, unfavorable currency drove our profitability down by roughly $100million after tax. In addition, input costs have increased year over year.Coke, pitch, natural gas, fuel oil and ocean freight have all increased between20% to 40%.
We have been able to overcome most of those input increases throughproductivity improvements, mix and market share gains. Now let's take a quick look at the income statement.
Asstated previously, revenues were impacted not just from lower LME prices butalso from the formation of the joint venture of our soft-alloy extrusionbusiness. The elimination of those revenues reduced quarterly sales byapproximately $400 million.
The income is now recorded as equity income andreported in the extruded and end product segment. As you can see, they are also significant swings inrestructuring costs, interest, other income and taxes, so let's go through eachone in greater detail.
This slide captures the major profit and loss items in thequarter that are either non-operating or are unusual in nature. We have alsoindicated where these items fall on the income statement and theirclassification by segment in order to provide clarity.
It would be difficult tounderstand the results without this breakdown, as this quarter had an unusuallyhigh volume of these items. The starting point is income from continuing operations of$558 million, or $0.64 per share.
I will now take time to go through each lineitem. Restructuring is essentially comprised of four components.
First, theloss on the anticipated packaging and consumer sale is $604 million, $389million of which relates to taxes. We have committed to sell this business inlate '07 or early '08.
The pre-tax charge for the anticipated loss on the sale wasapproximately $215 million. In addition, there will be a tax charge associatedwith the non-deductibility of goodwill.
The after-tax loss in the sale of auto castingsis $51 million. We are currently working through a definitive agreement withthe purchaser and anticipate closing that sale by the end of the year.
The AFL restructuring charge is $189 million. The chargeconsists of an impairment of goodwill totaling $93 million and a restructuringcharge of $96 million associated with the reduction of workforce and plantclosures.
Lastly on the restructuring front, we took a charge on ourAustralian roll product assets of $11 million, all related to severance costs.The design is to significantly narrow the product lines to ensure profitabilityand returns in the future. Next, the majority of the Alcan transaction costs thisquarter stemmed from the immediate amortization of the cost of the creditfacility.
We monetized our investment in Chalco. The book gain on the sale was$1.14 billion, or $1.30 per share.
The discrete taxes are generated by theone-time German tax rate change as well as adjustments generated by the filingof our 2006 U.S.return. We incurred incremental stock option expense as employeesexercised legacy reload options during the quarter.
These expenses wereincremental to the normal amortization and they are non-cash in nature. Reloadoptions have not been granted since '03.
The primary curtailment and start up costs include theimpact of Rockdale, Tennessee, Iceland and Jamaica,as well as a one-time charge for bauxite mine development of $13 million. Theyrepresent costs incurred in the quarter and we will detail them as we gothrough the segment slides.
Currency translation amounted to $34 million and we alsoincurred $17 million in mark-to-market losses on metal hedge positions. Alcoahedges fixed price customer sales in the downstream to eliminate commodityprice risk.
Most of these hedges qualify for hedge accounting, but sales thatdon't have firm volume commitments are subject to mark-to-market accounting.These charges are non-cash and are closed out and offset when the customershipments are actually made. They have been immaterial in the previous twoquarters of this year.
Now that you have a delineation of these individual items,we thought it would be worthwhile to reconcile the various components of theeffective tax rate on the next slide. The reported effective tax rate for thequarter was 63%.
With this slide, I will take you through the unusual items.The most significant impact on the reported rate is driven by the non-deductibilityof goodwill in the packaging and consumer business. The total book value, including the goodwill, would providea marginal pretax loss on the anticipated transaction; however, when computingtaxes, the book basis is reduced by the goodwill generating a gain and a tax onthat gain.
What you end up with is a tax cost on the loss which distorts theoverall rate. As I'm sure you're aware, there's also a difference betweenbook taxes and cash taxes.
The company can utilize ANT credit carryforwards andpension contributions, to name a couple, in order to mitigate its cash taxes.Once you pull out these restructuring and discrete items, you end up with anoperational effective tax rate of approximately 29% for the full year. The most significant takeaway from these detaileddescriptions is that the operating results were not only impacted by currency,higher energy and seasonality, but that there were a host of transaction and unusualcosts resident in the results.
Looking ahead, many will either be completelyeliminated or will materially diminish over the next two quarters. Now let's move on to the segment results.
For the aluminasegment, ATOI decreased $61 million. The majority of the sequential decreasewas driven by cost inflation, primarily energy, of $17 million; the impact of aweaker U.S.
dollar; and decreased volume, primarily due to Hurricane Dean. Inaddition, there was a $9 million one-time technology fee received last quarter,not repeated and a one-time charge for bauxite mine development of $13 million.
Looking to the fourth quarter, we anticipate a 2% to 3%increase in production, but pressure from fuel, oil and natural gas prices isexpected to continue. Moving next to the primary segment, sequentially primarymetal's ATOI decreased $179 million due to the following: First, the decline in prices.
The LME cash price on a one-monthlag decreased $149 a ton sequentially, while the Midwestpremium decreased $13 a ton. An exaggerated decline drives the earningssensitivity beyond its normal range; in fact, we saw the same type of earningschange in the third quarter of last year when LME price decreased by a similaramount and in the fourth quarter when LME price increased by a similar amount.
Costs associated with bringing our Rockdale and Tennesseesmelters back to full capacity were $29 million. Iceland'sstart-up costs for the quarter were $29 million.
As we previously disclosed,the third quarter was negatively impacted by seasonal energy of $13 million andcurrency, principally the euro, real and the A-dollar. Looking forward to the fourth quarter, we anticipate Icelandstart-up costs close to the same level as the third quarter.
The Rockdale and Tennesseesmelters should be fully online by the end of the year, and therefore withlower associated costs. Now let's move to the flat rolled products segment.
Flat rolledproducts ATOI decreased 34% on a sequential basis. The majority of the decreasewas due to normal seasonality, plus a destocking of distributor inventorieswhich adversely affected the shipment mix at our businesses in both the U.S.and Europe.
The remainder was due to pre-operating costsat the Bohai mill. Looking forward, we expect to see the destocking bydistributors and overall market softness to continue to the fourth quarter.
Moving next to the engineered solutions segment, excludingthe AFL performance, this segment again delivered outstanding results. Theinvestment castings, forgings and fasteners business delivered ATOI of $102million, a 19% increase over prior year quarter, even with the North Americanheavy truck decline.
Improvement was driven by productivity and market sharegains. Detracting from these results was the decline in AFL, auto castingsand auto structures.
ATOI decreased from a negative $8 million in the secondquarter to a negative $35 million in the third quarter. This $27 millionsequential decline was driven by the AFL business and can be broken down asfollows: $7 million for the one-time German statutory tax rate change; $7million for write-offs associated with the restructuring action; and $11million due to the stronger seasonal decline in the automotive market.
Looking forward, the Class 8 truck downturnwill be a bit more pronounced in the fourth quarter; yet you will begin to seethe positive impact of the restructuring activity in the AFL business. Moving to the extruded and end products segment, revenue wasdown significantly due to the fact that the soft-alloy business is nowaccounted for on an equity basis.
ATOI decreased from $46 million to $13million and was essentially driven by two items. Once the JV was completed, thebusiness began recording its depreciation which had been out of earnings whileit was held for sale.
We communicated this in the first quarter when it wasinitially placed in that category. Secondly, seasonality impacted thesoft-alloy business.
Looking forward, we anticipate seeing volume recoveryacross all these businesses. Moving next to the packaging and consumer segment, the packagingand consumer segment continues to perform extremely well with productivityimprovements essentially overcoming most of the expected seasonal decline.
As aresult, ATOI was down only $1 million versus last quarter. On a year-over-yearbasis, ATOI was up 50%, with productivity improvements in all businesses.EBITDA margins increased from 7.6% in 2006 to 9.2% in 2007.
Looking forward tothe fourth quarter, we expect continued productivity improvements and thenormal seasonal upturn in the consumer products business. Now let's talk about cash flow.
Cash from operations was$592 million after the $206 million pension contribution. Capital expendituresfor the quarter were $941 million, with roughly one-half devoted to the fourmajor growth projects-- Iceland,Mojin, Sao Luis and Juruti.
AsAlain noted, the depreciation of the U.S. dollar continues to inflate capitalexpenditures on our overseas growth portfolio.
The Chalco sale is captured on the sale of investments line. The other line that I'd like to draw your attention to isthe share repurchase amount of $1.3 billion.
Lastly, even though it's not onthis slide, we currently have $1.3 billion on our balance sheet in cash. Now let's move to the last slide to provide more detail onour share repurchase activity.
In January of this year, the board of directorsapproved a repurchase plan for up to 10% of our outstanding shares over athree-year time horizon. Through the third quarter of the first year, we haverepurchased approximately 5% of our outstanding shares.
After reviewing the company'sprospects for continued strong cash generation and divestiture proceeds, the boardhas just approved an increase in the authorization for up to 25% of theoutstanding shares through 2010. The share repurchases were modest in the first half of theyear, due to the pending Alcan offer.
Share repurchases were also limited inthe third quarter as the ongoing Alcan offer and pending Chalco transactionleft a relatively small window to actually repurchase shares. In order to determine the levels of activity in therepurchase program, the company will continue to evaluate our capitalstructure, market conditions, metal prices, as well as other funding needsincluding pension plans, capital spending and other potential growthopportunities.
In summary, we're taking great strides in executing ourportfolio strategy; investing in our upstream assets and the global reach ofour downstream businesses while at the same time utilizing our cash position toinvest in the company through share repurchases. Thank you for your attention, and we would be happy to takeyour questions.
Operator
Your first question comes from John Hill – Citigroup.
John Hill - Citigroup
Good afternoon and congratulations on all of the activities.It's really great to see the company being so responsive to shareholder preferences. Could you take a moment and describe the distribution ofthese charges as they relate to ATOI?
We've talked a bit about them in terms ofnet income and such, but could you walk through where these charges live at thesegment level?
Charles McLane
Yes, John. I think we've got that laid out on the one slidethat shows what categories, which segments they were in.
Instead of going backand taking the time of everybody on the call to take each individual line itemagain, I think it would be better if you would just refer back to that slide,if it would be okay.
John Hill - Citigroup
So the point is thatreconciliation applies also to ATOI, not just to net income?
Charles McLane
That is correct, yes.
John Hill - Citigroup
Perfect. As a quick follow-up, backing up to the market alittle bit, any opinions on what $360 spot alumina means for us out there?
Alain Belda
It basically means that the Chinese are not moving as fastwith their alumina production as they are with their smelter; and that bauxitecosts, if you look at transportation costs, it is really going through the roof.Plus there is some difficulty exporting out of Indonesiaat the moment. I think it says goodthings about alumina, the spot price anyway.
Operator
Your next question comes from the line of Kuni Chen - Bancof America Securities.
Kuni Chen - Banc of America Securities
Good afternoon, everybody. First a question on global acquisition,as far as the upstream businesses go.
Nothing out there is for sale, so do youthink this really restricts your future growth to just organic opportunities? Again,just talking about the upstream part of the business.
Charles McLane
I think the best way to look at that is that we're lookingfor obviously a host of organic growth opportunities but we are also taking veryseriously a long alumna position and think of that as a strategic asset. Welook for joint venture opportunities as well, so there are opportunities for usto grow organically as well as through joint ventures, not only on the organicside, but also through existing assets.
Kuni Chen - Banc of America Securities
Do you think at some point in the future that you wouldconsider a more diversified kind of metals portfolio approach, or is it alwaysgoing to be as a pure play alumina producer?
Alain Belda
Over the years, we have looked at diversified portfoliosthat included items like titanium, magnesium, manganese; products that havesimilar functions and go to similar markets that we operate in. We haven'tfound anything that would add market value to the shareholders and we didn't doanything in those times.
Doesn't mean that we wouldn't look forward to them.
Operator
Your next question comes from John Tumazos - IndependentResearch.
John Tumazos - Independent Research
Congratulations on all of the decisions. Concerning theshare repurchase, one of the developments, of course, is that when earnings aregood, the stock price is high and when earnings are a little weaker, the stockprice is a little less.
If business were rough, would you be willing to sell anextra business or two to get the whole 25% of the shares bought back by 2010?
Charles McLane
Our divestiture plans, as they are set right now, John, Ithink are pretty straightforward on the assets that we've identified and so Ithink the businesses that we're remaining in are earning better than cost ofcapital or in growth investments such as Chinaor Russia thatwill earn cost of capital in the future. So to easily answer your question, I don't think we would beentertaining those types of activities.
Operator
Your next question comes from Anthony Rizzuto - BearStearns.
Anthony Rizzuto - Bear Stearns
Alain, you talked about price caps on the can stock. I waswondering if you could talk a little bit about price caps or the fixed pricecontracts that maybe you entered into on the aerospace side?
My understanding is that they were of long-term duration andI know some probably expired, maybe in the last couple of years. But could youtalk about that a little bit as you head into 2008?
Also, if you could update us on the Russian aluminum assets.Are you aerospace qualified as we listen to you today, and how should we expectthe profitability or the performance of those operations? Have you changed yourview of when you think you'll be at breakeven on the Russian side?
Alain Belda
Let's talk about the aerospace contracts. We have contractsand sometimes they will have a fixed price.
When they do, we normally wouldhedge the underlying metal around those contracts. Sometimes you get intoissues where obviously if you have gotten a contract and you've done a hedge onit, you've got to take or pay on the volume and you might or might not get intoissues of delivery.
I would say that 90% of the cases we will have a matchingmetal hedging deal done with a fixed price contract. Sometimes, there areissues related to the specific delivery in a specific quarter, and that's someof the MPM that you saw on this quarter.
On the case of Russia,we've had some delays in Russiathat are related to the import of equipment into Russia.Those have delayed us, in some specific cases, for more than six months. So thedelay you're seeing in the turnaround of Russiaare related to that.
The qualification, some of the products are qualifiedalready on the aerospace, on wheels by Ford and some European customers. So wethink that Russiawill be in a much better position next year; output is improving.
We arebasically the sole supplier of can sheet in Russiaand that market is growing phenomenally. They have announced their firstregional jet and we'll be part of that, as you probably saw the release, whenwe signed the MOU, it was their company that will be building that.
So ithasn't changed anything but the delay has cost us additional time.
Anthony Rizzuto - Bear Stearns
I didn't notice in going through all the slides that youhave in the past broken out trailing 12 months, because of your internationaloperations impact on ATOI. Do you have that today?
Could you let us know whatkind of equipment issues there are in terms of what kinds of equipment havebeen long in coming or difficult to get a hold of?
Charles McLane
Well I'll take the first part of that, Tony. We did provideit.
There was a slight increase in the amount of costs in the operations andthat basically had to do with some severance and the Bohai pre-operating costgoing up. From an operational basis, Russiawas pretty flat.
Alain Belda
The equipment, we're heat treating furnaces and castingfurnaces that just took six months longer than we thought it was going to ingetting approval from the government for imports.
Operator
Your next question comes from Charles Bradford - BradfordResearch.
Charles Bradford - Bradford Research
Yes, I'd like to ask a couple questions about how youaccounted for the Icelandfacility. Since it's really completed even though you didn't have the power,did you stop capitalizing the interest and did you start fully depreciating theunit?
Charles McLane
It's done on a units basis, Chuck. So as it ramps up itsproduction, the economic benefit of that facility will be coming through and wewill start depreciating at a higher rate when that occurs.
Charles Bradford - Bradford Research
So it wasn't done in the third quarter then for an appreciableamount?
Charles McLane
No, a minimal amount.
Charles Bradford - Bradford Research
Where do you stand today in Trinidadas far as a new site, environmental impact statement and so on?
Alain Belda
We're completelystopped at the moment on Trinidad, depending on thegovernment making a decision as to what they want to do in terms of locationfor this potential smelter. Until they resolve what is an internal issue forthem, we are doing absolutely nothing at the moment.
Operator
Your next question comes from Michael Gambardella - JPMorgan.
Michael Gambardella - JP Morgan
Chuck, in your primary segment it looks like the metaltrading business where you also have the power sales, the revenue was down over$100 million in the quarter. Can you comment on that?
Charles McLane
On the revenueportion, Mike?
Michael Gambardella - JP Morgan
Yes.
Charles McLane
I don't have thatwith me, but the metal price decrease that we talked about of $135 million hadthe impact of the mark-to-market activity on it. I don't have the revenuechange handy.
Tony will be glad to give you that later.
Operator
Your next question comes from Joshua Golden – JP Morgan.
Joshua Golden - JP Morgan
My question surrounds the debt-to-capital. You've stated inthe past a 30% to 35% target but it appears that you've been willing to deviatefrom that.
Given the increase in the share repurchase that's been announced,possible future acquisitions, how should we think about the balance sheet goingforward? What are you committed to for bond holders?
Alain Belda
Well, over the years,what we've given you as a guidance is that we like to have a balance sheet thatis somewhere between 25% and 35% debt to equity. Now, we have deviated, you'reright, we've gone above 40% when we've done some acquisitions.
Depending on thevalue that we see in the acquisition, the moment in time when the opportunitycomes, we might take that kind of risk.
Joshua Golden - JP Morgan
Are you willing tocommit to mid-BBB rating?
Alain Belda
We are committed tobeing at minimum a BBB company.
Operator
Your next question comes from David Gagliano - CreditSuisse.
David Gagliano - Credit Suisse
I was just wondering if you could remind us again what yourpolicy is towards hedging, specifically with regard to currency and energy? Ifwe could get a little more detail in terms of your A-dollar exposure, inparticular, that would be great.
Thanks very much.
Charles McLane
Let me give you thesensitivity first. What we said last time is a 1% change against our majorcurrencies to the U.S.
dollar would be about $0.02 a share on an annual basis.Now that's on an economic basis. In other words, you've got a translation pieceof currency that impacts you based on whatever the exposures are, but theeconomic basis, the actual cost or revenue during the course of the quarter,you can use that $0.02 change for every 1% change on an annual basis.
As far as our policy is concerned, we don't speculate,that's our policy. We may do some smoothing from time to time on a percentagebasis, but we don't take speculative positions.
David Gagliano - Credit Suisse
With regard to the repurchase program, if we were to assumeeverything equal, share price stays flat for the next 12 months, I waswondering if you could just give us a sense as to where we should expect thatrepurchase authorization to be in terms of how much you have left to go, in saya year?
Charles McLane
I think that would bea little too restricting to tell you the truth. We'll continue to look at ourcapital structure and our other growth opportunities, our CapEx, et cetera, ourbalance sheet is in an outstanding position today, we've got cash.
We alludedto the fact that we will probably have repurchased at a little higher level inthe third quarter if we had not been so restricted. But with all of thevariables going into what might happen six months from now, a year from now,we're not going to restrict what we're going to do.
Operator
Your next question comes from Jim Brown - JP Morgan.
Jim Brown - JP Morgan
Based on the capital spending in the third quarter, whichwas quite high, it seems as if you might have difficulty keeping capitalspending down to $3.2 billion for the year. Could you give us an idea of wherecapital spending will be and also, could you give us an idea of the Icelandramp-up schedule?
Charles McLane
Well, let me take the capital spend. That's on a cash basisto us, and there's two different categories on our cash flow statement.
One isour capital expenditures which if you just looked at that it would seem thatwe're going to have trouble hitting that; but the other category is the amountof capital calls we get from our minority partners. So you really have to netthose two to get down to a net cash impact.
Taking that into consideration, what Alain said earlier isexcluding currency on our CapEx, which we think is going to impact us close toa couple hundred million this year, we would be within target. So the firstpart is you've got to net out the capital calls that we get and then take thecurrency into consideration of a couple hundred million that we would be withinthat range, a couple hundred million of our target.
Jim Brown - JP Morgan
Icelandramp up?
Alain Belda
Iceland,we will be at about 30,000 tons at the moment and starting some time lateNovember or mid-November, we will, I believe, the plans at the moment are thatwe'll start ramping up. The people have been training pretty arduously now tobe able to start up at an accelerated pace, so we believe that we will be atabout 300,000 tons for the full year 2008.
Operator
Ladies and gentlemen, that concludes our Q&A session.I'd like to hand the call back over to Tony Thene for closing remarks.
Tony Thene
Thank you, Shawn.Thank you for your participation. That now concludes our third quarter 2007analyst conference call.